March 10, 2020
The Federal Reserve announced an emergency interest rate cut of one-half of a percentage point, reducing the U.S. federal funds’ rate to a range of 1-1.25 percent. While the primary goal of the rate cut was to stabilize the economy after fears surrounding the coronavirus, it has an impact on nearly everything. You’ll want to understand how to leverage the Fed’s interest rate cut for your financial advantage before making a change to mortgages, auto loans, student loans, and checking and savings accounts.
Mortgage interest rates are currently at or near all-time lows. This may beg the question, should I refinance my mortgage? While the thought of a lower interest rate may be attractive, there are other factors to consider before starting the process.
Start by comparing the interest rate spread between your current mortgage and current interest rates. Refinancing can be attractive when the interest rate spread is equal to or greater than one-half of a percentage point.
Next, evaluate the closing costs and how long it will take you to break even on your closing costs. Also decide how long you plan on living in your home. If you have an adjustable rate mortgage and you plan on living in your home longer than the initial fixed interest term, it is certainly worth looking into either refinancing into a new adjustable-rate mortgage that is better aligned or a fixed-rate mortgage that provides more flexibility. If you do not plan on living in your home long enough to breakeven on your closing costs, it probably does not make sense to refinance.
Auto loans have fixed interest rates that are tied to Treasury yields, however, falling rates will likely not predict what dealers and auto lenders will offer. If you are in the market for a new or used car, consider securing bank financing before going to the dealership. Bank financing may allow you to better take advantage of currently low interest rates.
Do you have high-interest student loans? Has your income or credit increased significantly since you last refinanced your student loans? If you answered yes to either of these questions, now may be a good time to consider refinancing your student loans.
Interest rates being at or near all-time lows could reduce your monthly payment amount and/or your remaining loan term. If you have federal student loans, keep in mind that refinancing with a private lender may forfeit benefits such as potential loan forgiveness, lower repayment plans, deferment and forbearance.
Lower interest rates typically mean that any balances in your checking or savings accounts will earn less interest. These accounts should not see much impact by lower interest rates, as they are currently yielding next to nothing. However, if you have a high balance in your checking or savings accounts, you should consider opening a high-yield, online savings account. While these accounts are also subject to lower interest rates, they continue to yield more than one percent to one and one-half percent more than a typical checking or savings account.
Use these tips when evaluating how to leverage the Fed’s interest rate cut for your financial advantage. If you’re a high-income earner looking for additional guidance in debt reduction, investment management, tax and estate planning or asset allocation, the advisors at Budros, Ruhlin & Roe are here to help. Our program called GROWwithBRR can address uncertainties about building your financial future.
Kevin Wuebker, CFP®
Senior Wealth Manager